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The Scary Message for Everybody in Obama's Budget

Most Americans will ignore the dickering over the federal budget that President Barack Obama wants Congress to pass this year. But there's an important message for just about everybody in that budget: The pain is going to get worse.

It would be easy to conclude that Washington has imposed enough austerity on the U.S. economy already, given the tax hikes and spending cuts that have already gone into effect this year. Those measures, if they stick, will reduce the national debt by perhaps $2.5 trillion during the next decade.

But that's not enough. Budget experts say Congress needs to cut the debt by at least $4 trillion, plus figure out ways to rein in the mushrooming cost of the biggest budget-busting programs: Social Security, Medicaid and especially Medicare. Budget measures up till now have done nothing about those so-called entitlement programs, but Obama is finally seeking some reforms.

The changes Obama is calling for are less drastic than those advocated by Republicans such as Rep. Paul Ryan of Wisconsin, chairman of the House Budget Committee. Among other things, Ryan's plan would transfer a major portion of Medicare costs to individuals, as a way of making the whole program more affordable. But Obama would still change entitlements in ways that would have a direct impact on people enrolled in them, in many cases reducing benefits and requiring enrollees to spend more of their own money.

Obama, for instance, wants to reformulate the way cost-of-living increases for Social Security payments get calculated. Many experts say switching to a so-called "chained" consumer price index would be a more accurate way to measure inflation. But in general it would mean lower cost of living increases for Social Security recipients. For a typical retiree, a 1 percentage point reduction in the cost-of-living increase would cut Social Security payments by about $150 per year.

Relatively minor adjustments might be enough to make Social security more stable, but Medicare is a bigger problem. Obama wants to make some administrative changes in the program that might lower payments to healthcare providers, while also reducing benefits or raising premiums for wealthier Medicare patients. But on its current course Medicare is headed for insolvency, and Obama's moves probably wouldn't be enough to change that. At some point, bigger cuts will be needed, with most seniors likely to pay more.

The next several months in Washington will be dominated by news coverage of political posturing on the budget. Democrats and Republicans will accuse each other of selling out seniors and pandering to favored interest groups. We all know the drill, which is why so many people will tune out the overwrought rhetoric.

But it's important to notice the broader message, which is that the government is going to do less for people in the future, and ask more of them. Obama, for example, has said he'd only agree to cutbacks in Medicare and Social Security if Republicans agree to further tax increases on the wealthy. Many economists think tax hikes will have to be more widespread than that at some point, with no way around middle-class tax increases if problems with the federal budget become acute.

Liberal groups are outraged that Obama would propose any change at all in entitlement programs, while conservatives insist they won't agree to any more tax increases, no matter what. That's predictable posturing at either end of the political spectrum. Just about everybody in between knows that eventually there will be more spending cuts and higher taxes. Smart Americans will plan for it.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.